Contributors: Greg Cass, Atul Jhavar, Will Jones, Karan Shah
26 Apr 2022
Sustainability-linked bonds (SLBs) have exploded in popularity since the publication of ICMA’s SLB Principles in 2020. After a high-performing 2021 in the SLB market, and with investor demand for sustainability-themed products and measurable sustainability metrics on the rise, our Investment Banking experts in London, New York, Paris and Singapore share three key insights on the future of SLBs.
Contributors: Greg Cass, Atul Jhavar, Will Jones, Karan Shah
26 Apr 2022
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1. SLBs’ flexibility is driving growth
With heightened investor focus on sustainability and the challenge of delivering on Net Zero commitments, corporates are increasingly attracted to SLBs, which offer more flexibility relative to other green financing options.
SLB proceeds can be used for general corporate purposes, which makes them accessible for more carbon-intensive sectors, such as oil and gas, or for issuers with limited capital investment requirements in green assets. Additionally, an SLB’s financing terms are linked to measurable sustainability-related performance targets or outcomes, which investors are seeking. What’s more, SLBs are suitable for both investment grade and high-yield issuance.
As a result, companies have embraced SLBs leading to a sizeable uptick in issuance over the last two years. All global sustainability-themed bond supply from corporate issuers totalled $270 billion in 2021 – a growth rate of 170% compared to 2020. SLBs comprised just 6% of 2020’s issuance volume, but 26% of 2021’s (see figure below).
SLB issuance across sectors including manufacturing, infrastructure, pharma, telecoms and tech is driving this growth, with most structures utilising environmental key performance indicators.
However, some sectors – particularly those with socially-focussed missions – may be less inclined to utilise SLBs, given the lack of consistency on material key performance indicators and the difficulty of proving the ambition of targets. Yet work on both regulatory and voluntary metric frameworks could address those concerns, contributing to growth over time. For example, the EU’s Social Taxonomy, which aims to define sustainable social activities by introducing transparent sustainability metrics, could encourage further interest from corporates and issuers such as higher education and charities.
As more issuers enter the market, the ensuing ‘peer pressure’ effect should fuel further growth, as investors and issuers look to participate in a movement with a strong upward trajectory.
2. Europe is leading – but the world is watching
Regional markets are maturing at different rates when it comes to sustainability-linked issuance, with European companies leading in terms of green targets. However, US companies have identified a similar appetite and are closely monitoring Europe to see what lessons can be learnt from implementation there. A recent proposal from the SEC on climate disclosures could further boost US SLB issuance growth by requiring reporting of key environmental metrics and associated targets.
Despite broad interest in sustainable finance in APAC markets, SLBs currently make up less than 10% of cross-border sustainability-themed issuance from the region. However, new issuances from Latin America suggest that SLBs will see significant expansion in worldwide markets, with new waves of interest and products to follow.
With investors increasingly demanding sustainability commitments, Greg Cass, Head of Sustainable Capital Markets, Americas, looks at the rapid growth of – and outlook for –sustainability-linked bonds.
3. SLBs could impact more than just the bond market
Sustainability-linked bonds offer issuers the chance to move beyond rhetoric and show investors how strong their organisational commitment to achieving net zero and other sustainability targets really is.
The flexible use of proceeds from SLBs could lead issuers to push the boundaries of how these funds help them achieve their goals. For example, companies may deploy the funds to develop new or enhance existing products, services or operations that drive towards more sustainable outcomes. Given the reporting requirements for SLBs, issuers will have to be transparent about progress towards their targets, providing greater insight into organisational strategies and results.
Successfully meeting an SLB’s performance targets could have positive financial and non-financial effects for the issuer well beyond the bond’s repayment term. However, falling short of those targets could have broader consequences. Either way, investors will have more insight into companies’ performance, which could influence equity or bond-holder behaviour in the future.
As SLBs gain traction, our Sustainable Capital Markets team look forward to working with clients to get the financing they need to achieve both organisational and sustainability goals.
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About the experts
Head of Sustainable Capital Markets, Americas
Greg Cass runs the Americas Sustainable Capital Markets practice and is based out of New York. Greg has been with the firm since 2007. Before moving into his current role in 2020, Greg worked in the Global Finance Advisory team, analyzing capital allocation, capital structure, financial risk management, and cost of capital strategies for corporate issuers, primarily focusing on the Healthcare and Technology sectors. Greg has a BS in Industrial Engineering & Operations Research with a minor in Economics from Columbia University.
Head of Sustainable Capital Markets, Asia-Pacific
Atul Jhavar is a Managing Director within the Investment Bank. Based in Singapore, he leads Barclays’ Sustainable Capital Markets business in Asia-Pacific and also oversees the firm’s DCM business in Southeast Asia.
Atul has over 15 years of experience in the Asian fixed income markets. He has spent most of his career based in Singapore and Hong Kong and has executed numerous transactions for sovereigns, banks and corporates in the region, including green bonds, green project finance and sustainability-linked debt.
Atul has a degree in Computer Engineering from Nanyang Technological University.
Director, Green & Sustainable Capital Markets
Will Jones is a Director within the Investment Bank based in London and is responsible for structuring and arranging ESG debt products including Green, Social, Sustainability (GSS), Transition and Sustainability-Linked Bonds.
He has over 12 years of investment banking and advisory experience, with particular emphasis on debt origination, structuring and syndication. Will has significant experience working with clients across all sectors in Europe, most recently focusing on Northern European transactions in UK and Nordics, as well as CEEMEA. Will has acted as Structuring Advisor to numerous issuers covering the corporate, financial and charitable sectors.
Will holds an honours degree in Finance, Accounting and Management from the University of Nottingham.
Managing Director, Head of Fixed Income Syndicate
Karan Shah is a Managing Director within the Investment Bank, and leads the Fixed Income Syndicate business for Barclays Europe, based in Paris.
He has over 14 years of experience, the vast majority spent in London, executing transactions for the firm’s global Corporate clients, across Developed and Emerging Markets.
In addition, he is the ESG Lead for the desk. Karan has a degree in Mathematics and Economics from the London School of Economics.